Management's Incentives to Avoid Negative Earnings Surprises

Recent reports in the business press allege that managers take actions to avoid negative earnings surprises. I hypothesize that certain firm characteristics are associated with greater incentives to avoid negative surprises. I find that firms with higher transient institutional ownership, greater reliance on implicit claims with their stakeholders, and higher value-relevance of earnings are more likely to meet or exceed expectations at the earnings announcement. I also examine whether firms manage earnings upward or guide analysts' forecasts downward to avoid missing expectations at the earnings announcement. I examine the relation between firm characteristics and the probability (conditional on meeting analysts' expectations) of having (1) positive abnormai accruals, and (2) forecasts that are lower than expected {using a modei of prior earnings changes). Overall, the results suggest that both mechanisms play a role in avoiding negative earnings surprises.

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